Many countries reacted after the failure of big companies where audit independence was in questioned. We've received widespread press coverage since 2003, Your UKDiss.com purchase is secure and we're rated 4.4/5 on Reviews.io. Auditor independence refers to the independence of the external auditor. Leadership that stresses the importance of ethical behaviour, Resignation from engagement can be extreme safeguard but in come circumstances the only option available. Independence in fact and appearance relates to the integrity and objectivity of the auditor. Accounting firms have incentives to avoid providing negative audit opinions to the managers who hire them and pay their auditing fees. As a result, some audit firms have commercial interests to protect too. So, the issue of auditor’s independence has always been an important public concern and a matter of many debates, especially because of the fiduciary role played by the auditors in modern society. So if the period of audit to the client is just few years, the risk is quite low so as a safeguards, audit firm can simply let the another partner to review the audit but if the audit period is longer such as 10 years, then the risk is significantly high so audit rotation (rotation of audit partner or even audit manager in some cases) would be better as the safeguard. Reference this. Independence is the main means by which an auditor demonstrates that he can perform his task in an objective manner. It is characterised by integrity and requires the auditor to carry out his or her work freely and in an objective manner. The apparent conflict of interest for audit firms in the provision of non-audit services to clients has been an enduring concern to many regulators and commentators. The audit profession has recognised the following threats to auditor independence, many of which are linked to the provision of non-audit services: Self-interest threat: Where an auditor is financially dependent on the audit client or where an auditor or someone closely associated with him has a financial or other interest in the audit client. If internal audit is to retain its necessary independence in practice, it must take the time to invest in its relationships with the board, audit committee, key business stakeholders and senior management, sustaining a steady and robust dialogue with each party in order to perpetuate its own functional success. Independence is an important auditing standard because the auditor adds justification and credibility to financial statement even when there are no material misstatements or omissions in the financial statements prepared by management (okolie 2007). But from ethical point of view, familiarity is a huge problem as the more auditor became familiar with the director, it will be more difficult for him to argue that he is independent. Importance of audit independence: Auditors need to be unbiased due to the nature of the work it imparts. Doubts are sometimes expressed regarding the independence of external auditors. The auditor independence is measured by how honest an auditor … It was the auditor to avoid the case where there is financial involvement of family members or involvement of personal relationship etc. The decision of the New Zealand Court of Appeal in the Scott Group case agreed that the auditors had been negligent when they failed to detect a material error in the accounts of a company. In the wake of numerous accounting scandals of Enron, WorldCom, etc, the importance of auditor independence has been brought to the forefront of the accounting profession. Why is Auditor Independence Important? Independence is an essential attribute for audits because it determines how credible and reliable financial statements will be to investors. The firm was convicted in March 2002 which resulted in its ability to audit companies being withdrawn and in June 2002, the “Big Five” became “Big Four” (Tom Campbell, 2005). inpractice Auditing 05 Nov 2015. Finally, the lack of external auditors’ independence has an overall effect on many other parties other than the ones directly involved. Importance of auditor independence As discussed above there are three types of auditors, they are internal auditors, external auditors, and government auditors. This include cost, but it can be very useful, if the audit firm is the sole practitioner. This approach was represented as law in WA Chip & Pulp (1988) case where Justice Wallace rejected the argument of the auditors that auditor’s duty does not include the detection of fraud and held that the auditor’s duty went beyond the need to examine the financial statements and whether the fraud was uncovered or even if there was a suspicion of it and promptly failure to report the directors or senior management about it constituted negligence. The primary purpose of an audit is to provide company shareholders with an expert, independent opinion as to whether the annual accounts of the company reflect a true and fair view of the financial position of the company and whether they can be relied on. The auditor should be independent from the client company, so that the audit opinion will not be influenced by any relationship between them. While appearing independent is about preserving “Independent of appearance” which is how public/users perceive auditor as being objective which is important to get users confidence over auditor’s judgement. It is critical for an auditor to be independent of the firms they audit due to many reasons. This create the risk of self-review threat on the audit independence and self-interest threat as there was a fear of losing a large client which lead to failure to inform investors on Enron’s non-disclosures (Tom Campbell, 2005). CA ANZ suggested the government to improve the Corporate Reporting standard. The company must inform through writing to Registrar within 5 working days of the power becoming exercisable. Independence has been the focus of almost constant controversy, debate and analysis (Law, 2008, p.917). The demise of Arthur Anderson is normally linked with Enron case as there were visible lack of audit independence. The main purpose behind providing licence and proper ongoing competence programmes to the overseas qualified and experience auditor is to protect the quality of audits which support the independence. An auditor with experience of the business and the sector that they have developed over several years will support the risk assessment work. (b) Safeguards within the firm’s own systems and procedures. 5. In this case, the judge held that foreseeability alone is not sufficient enough to establish a duty of care, they need to prove the relationship of proximity as well (Arens, 2013) (Robyn Moroney, 2014). Independence Requirements. It is a legal obligation for an external auditor to be independent. So, the member must get the proper training about the policies and procedure and the disciplinary procedures within it so that if somebody breaches it then they will be discipline accordingly. With each new fraud and ‘audit failure’ divulged in the financial press, more pointed questions are being asked about the value of the independent audit. There is a chance of intimidation threat due to the pressure from HIH for the reduced fees as well. Any opinions, findings, conclusions, or recommendations expressed in this dissertation are those of the authors and do not necessarily reflect the views of UKDiss.com. 4. Institutional safeguards are broad such as education and training that can be recognized the person as the professional accountants (Ainul Islam, 2005). The auditors are expected to give an unbiased and honest professional opinion on the financial statements to the shareholders. Auditor independence simply means the ability of the auditor to adopt an approach with integrity and objectivity within the audit process. Safeguards are actions or other measures that may eliminate threats or reduce them to an acceptable level. Actual independence is quite straightforward. Despite this general prohibition, section 290.173 states that provision of accounting and bookkeeping services of a routine or mechanical nature to divisions or related entity audit clients that are public interest entities would not be impairing independence if the personnel providing the services are not members of the audit team and either: (a) the divisions or related entities for which the service is provided are collectively immaterial to the financial statements on which the firm will express an opinion; or. The extent of reasonable care and skill and caution is based on the circumstances of each cases (Academic Dictionaries and Encyclopedias, 2014). If the directors of the company have been misleading the auditor by providing manipulated accounting information, then they may try to prevent auditor from reporting this. New Zealand has basically followed the IFAC rules as the basis of their requirements. Under this section, Equity investment (including options) in clients is specifically prohibited. The recent case of negligent by the auditor was Cattles vs PwC where PwC was fined of $2.3 million for negligence with the case settled in October for an undisclosed sum. Disclaimer: This dissertation has been written by a student and is not an example of our professional work, which you can see examples of here. institutional safeguards and safeguards specific to the work environment. The Company Act 1993 (section 207) clearly stated that the auditor must report to the shareholders of the company instead of any managers or directors on the financial statements audited by them and the report must be comply with the requirements of all applicable auditing and assurance standards (Companies Act 1993, 2018). As per the section 207W of the Company Act 1993 and principle 7.2 of NZX Corporate Governance Code, the board of directors must involve the auditor in the meeting of the shareholders and the auditors are free to communicate the concern of the auditor as auditor (NZX Corporate Governance Code 2017, 2017) (Companies Act 1993, 2018). Importance Of Auditor Independence. This set up the strict entry requirements for the auditor which is intended to ensure that all auditors have the required qualification, knowledge and skills to carry their duty and role to an acceptable standard (Auditor Regulation Act 2011, 2017). During the 1990s, the financial importance of non-audit services to public accounting firms increased dramatically, and the growth of the consulting divisions or companies associated with the largest audit firms is seen as a significant possible impairment to the independence of audit partners (D A. Moore, 2004). Auditor professionals will always argue against the audit rotation. The need for independence arises because in many cases users of financial statements and other third parties do not have sufficient information or knowledge to understand what is contained in a company’s annual accounts. As per the Company Act 1993 (section 207Q) the authority to select the auditor goes to the hand of the Registrar if the annual general meeting of the company is not able to appoint or reappoint an auditor. Remember !! The duty of care was not extended to other parties that are not known to auditors till the case of Candler v. Crane, Christmas & Co (1951). HIH Royal Commission Report (2003) is considered the biggest corporate collapse in the history of Australia where Justice Owen made number of recommendations with regards to the auditor independence and their duty of care which consider as on the major reason for the collapse (Robyn Moroney, 2014). Familiarity threat: The relationship between the auditor and client is long-standing or otherwise is so familiar that the auditor becomes involved in advising the client or acting in a management role. Most threats arise from one of the following sources: The Code identifies two broad categories of safeguards that reduce threats to an acceptable level. Doubts are sometimes expressed regarding the independence of external auditors. Registered office: Venture House, Cross Street, Arnold, Nottingham, Nottinghamshire, NG5 7PJ. The term “reasonable care and skill” is consistently increasing with time and cases. And it is this experience, according to the report, that will allow the independent auditor to precisely challenge management on the most contentious areas. Auditor independence is commonly referred to as the cornerstone of the auditing profession since it is the foundation of the public's trust in the accounting profession. The major issues that affect the audit independence are long relationship between client and audit, provider non-audit services to the client, employment of former auditors of client, job opportunities, related party etc. The familiarity threat cause due to long term relationship between auditor and client is a kind of double edge sword as it is also beneficial to the auditor as they are familiar with the business of the client, familiar with their system, know their customers, suppliers therefore, it will be easy for an auditor to identify the risk related with the business. Arthur Anderson was the audit partner of Enron who was one of the largest audit firm at that time and was a part of “Big Five”. Review of the file by a partner not involved in the audit engagement. Training of staff in these policies and procedures and appropriate disciplinary procedures. If you know that the auditor for ABC Company keeps a close, personal relationship with the CEO CEO A CEO, short for Chief Executive Officer, is the highest-ranking individual in a company or organization. Independence is one of the most important attributes of the accounting profession. There are infinite of ethical issue that can be faced by professional auditor and thus it is impossible for the code to cover all these situations. The independence of external auditors had been brought into question because of the potential influence the corporations had on its auditors. New Zealand has basically followed the IFAC rules as the basis of their requirements. More than 100 years back in 1896, the landmark judgement was delivered in Kingston Cotton Mill case where Lord Justice Lopes describe an external auditor as “watchdogs” rather than “Bloodhounds” which establish the principle that auditors’ duties involve the exercising of reasonable professional care and skill. Auditor independence —meaning independence of both the firm engaged to perform external audits and the individual auditors who conduct the audits–is a central facet of external auditing. In the recent Feltex case (2010) where the auditor was found guilty of negligence and highlighted the point such as lack of communication between the audit firm and client and how the auditor was failed to explain the difference between review engagement and full audit. The findings were in favour of the auditors which was contrasted with the findings in the AWA case where the auditor was found negligent (Malane, 2005). Many companies have joined Enron and WorldCom in issuing earnings restatements because of inaccuracies in published financial reports. The Company Act 1993 dictates that the company must be appoint an auditor if the financial statements must be audited and it is the responsibility of the shareholders to appoint the qualified auditor at the annual general meeting which can be changed in next annual general meeting if the shareholders wished. Nevertheless, the auditor should carry out his task with an inquiring mind, investigate any suspicious circumstances to their satisfaction and if necessary, warn management about it (Mills, 1990). There are occasions where independence of the auditors may be threatened or appear to be threated so the frameworks identify five threats to independence. •Programming independence: auditors have freedom to develop own programme, both as steps to be included and amount of work to be performed, within overall bounds of engagement. The auditors are in dilemma regarding the term as the court may conclude the auditor’s judgement on the degree of inquiry to be made fell short of the “reasonable care and skill” expected at that time despite compliance with the usual auditing standards and practices (Mills, 1990). The importance of audit independence has been increased mainly due to the recent audit failures such as Enron, WorldCom, HIH Insurance, Feltex etc. The importance of auditor independence standards that are reasonable and yet comprehensive, rigorous, robust and enforceable has been underlined by several significant corporate failures in which questions have been raised about the quality of financial reporting and, in particular, the independence of the auditor. They believe that once the auditor signed the annual report of the company it means that the company has been investigated for fraud and wrongdoing and the financial statement are totally accurate and it reflects the true financial position of the company (Mills, 1990). This section also prohibits an auditor from being an employee, director or officer of a client company. This raises concerns that the auditor's interests to protect shareholders of a company and his commercial interests may conflict with each other. Section 290.172 of Code of Ethics, generally prohibits the provision of accounting and bookkeeping services to audit clients that are public interest entities. The client requires persons other than management to ratify or approve the appointment of a firm to perform an engagement. The financial audit remains an important aspect of corporate governance that makes management accountable to shareholders for its stewardship of a company. The HIH board of directors included three former partners of Anderson. Self-review threat: A judgment is required of the auditor which demands that previous work of the firm (whether audit or non-audit) be challenged or re-evaluated. Under the recommendation 3.2 of NZX Corporate Governance, no employee of the company can attend the committee meeting without the invitation from the audit committee which protect the independence of the audit committee from any undue influence (NZX Corporate Governance Code 2017, 2017). The trust threat: The auditor becomes too trusting of directors and management, thereby preventing a proper testing of management information and representations. These reviews must be carried out before the auditor signed the audit report. The code is the blended of principles and rule with the heavily reliable on principles (KnowdegEquity – Support for CPA, 2015). Thus, they rely on the auditor’s independent assessment and the auditor’s main objective is to express an audit opinion over financial statements (Corplaw Admin, 2014). We're here to answer any questions you have about our services. The Need For Auditor Independence. This independence can be maintained through external constraints (i.e., legislation and regulation) or through the profession itself, which will maintain independence to preserve its market value (Kinney 1999). It can be argued that unless suitable corporate governance measures are in place, a firm of auditors may reach audit opinions and judgments that are heavily influenced by the wish to maintain good relations with the a client company. An n auditor must ensure that his judgement is not impaired by reason of any relationship with or interest in the company (Company Act 1993, 2018). auditor independence is directly related to client importance. Individual circumstances make it difficult to set a general limit, but a review and safeguards are needed when the total fees from an audit client exceed 15% of the gross fees of the firm (section 290.222 of the Code) (Professional and Ethical Standard 1, 2016). The auditors are expected to give an unbiased and honest professional opinion on the financial statements to the shareholders. As per FMA Act, the company should report all the fees paid to the auditor for audit and non-audit services to the shareholders and stakeholders through the annual report along with the details of it and the reason on how it does not affect the objectivity and independence of the auditors (Financial Markets Authority Corporate Governance in New Zealand, 2014). This principle helps the company to balance between the efficiency, cost and independence related with the auditing. The auditor should be independent from the client company, so that the audit opinion will not be influenced by any relationship between them. The auditors’ fees and expenses must be fixed for the period it is appointed or till the next annual general meeting by the source they were appointed such as shareholders through meeting or directors if it is casual auditor or Registrar/ Audit-General as per the section 207S of the Company Act 1993. Discussing ethical issues with those charged with governance and audit committees if one exists. The partner who are not involved in the audit engagement can always review to check that the independence is not compromised and to conduct another review to find out that the quality of the audit is up to the required standard. The auditors are expected to give an unbiased and honest professional opinion on the financial statements to the shareholders. An auditor is a qualified person who carries out the audit assignment and reports on the ‘true and fair view’ of the client entity’s financial statements so that the users of financial statements can rely on the reliability and credibility of the financial statements. This act really helps the users of report to understand and to get satisfied on auditor’s objectivity and effectiveness and this report also need to include the identification of threat, the mitigation factors and the safeguard used for it. Independent auditing has been an important part of the corporate monitoring system since the mid-1930s, when it became a legislation requirement after the Great Depression. Anderson was performing non-audit service as well to HIH. Consequently, shareholders have high demand for audit independence. Specifically, a suitably experienced and objective professional with sufficient stature should evaluate the next audit engagement to determine whether the team maintained its independence. It is as reported on 1st March, 2020. This case also questions about the standards followed by the auditor (Allan, 2018). The primary purpose of an audit is to provide company shareholders with an expert, independent opinion as to whether the annual accounts of the company reflect a true and fair view of the financial position of the company and whether they can be relied on. The Code of Ethics for Professional Accountants is in line with the conceptual approach to auditor independence (Ainul Islam, 2005) . In the aftermath of Enron’s demise, the accounting firm was accused of not acting independently and suggestions were made that they had gone along with the accounting practices in Enron in order to retain their work. The principal responsibility of an auditor is to report on whether the accounts of the company are “true and fair” and present fairly the company’s financial position and the results of its operation as per the accountancy professions. Also, according to the Company Act 1993 and section 290 of the Code of Ethics, an auditor cannot have any employment relationship with the client company or related company such as director, employee, liquidator or receiver. New Zealand Institute of Chartered Accountants has been granted accreditation under the section 50 of Auditor Regulation Act 2011 (Auditor Regulation Act 2011, 2017) but FMA must monitor the audit regulatory systems of each accredited body to the extent that it is adequate and effective and if the body are failed to comply with it, they may considered as committed an offence and is liable for fine not exceeding NZ$100,000.00 (Auditor Regulation Act 2011, 2017). When company was reluctant to increase the audit fee, Anderson decided to reduce the amount of work performed for the company. The intimidation threat: The auditor is intimidated by actual or potential pressures from the client or other party. The user of the audit report mostly perceives these issues as reducing auditor’s independence (Hay, 2004). So, if there are major threats to independence that cannot be overcome with any other safeguards then the only thing that will be available would be resignation of the auditor (CPA Ireland, 2017). If this happens, the auditors can no longer be said to be independent and the shareholders cannot rely on their opinion. Explain the measures that an auditor should place to safeguard his independence when providing other services to clients 3. A high profile example would be the relationship between Enron and their auditors, Arthur Andersen. After this case, the extent to which auditor are expected to be suspicious and exercise their responsibilities has been debated in many cases. These are safeguards attributable to: (a) Safeguards created by the assurance practitioner’s profession, legislation or regulation; and. All work is written to order. Opposite to this case, In Columbia Coffee & Tea Pty Ltd v. Churchill (1992) where the Judge held the decision against using the audit firm’s manual to rule that the auditor owed duty of care to the third party. > Disclaimer: I am not a CA, or involved in this profession. What are the SEC Auditor Independence Rules? Audit independence is important so that auditor’s opinion can be impartial, unbiased, free from any undue influence or conflict of interest to override the professional judgement of the professional accounting (Rutgers Accounting Web, 2015). Preparing accounting records and financial statements for audit clients poses a substantial self-review threat. The section 207U of the Company Act 1993 further protect the independence of the auditor by rule for replacing the qualified auditor. The ultimate safeguard is resignation. The code of ethics has three parts where part A also establishes the fundamental principles of professional ethics for members and provides a conceptual framework for applying those principles. The structure of the audit committee is particularly important, both in terms of independence and the skills required(Financial Markets Authority Corporate Governance in New Zealand, 2014). Justice Moffitt acknowledge that auditor is not an insurer and their duty is verification not detection of all errors that may occur in company’s financial statement (Tom Campbell, 2005). External auditors are hired by parties who are likely to benefit from the information provided in the audit like stakeholders and investors. The auditor who is the member of the licensed body must require completing the competence programmes to maintain their ongoing competence under the section 18 of Auditor Regulation Act 2011. And auditors charged with independently reviewing a firm’s financial reports have often been found to be complicit with firm management in this effort (Levitt & Dwyer, 2002). Familiarity—when an auditor becomes too sympathetic to the interests of another party because of a close relationship. The different perception of public and accountancy profession about the role and responsibilities of an external audit creates the expectation gap. As per this FMA Act, the accounting firm should not take any work for a client that can compromise or seen to be compromise the quality, independence and the objectivity of the audit process (Financial Markets Authority Corporate Governance in New Zealand, 2014). Big companies where audit independence for shareholders shareholders are the direct beneficiary of companies and they will get more if! Section 290.172 of code of Ethics for assurance Practitioners ( PES 1 ) also many... 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